The concerns around Tether stem from its reported sizeable share of Bitcoin’s liquidity and the resulting broader market sentiment that it represents a systemic risk to the ecosystem. Further, suspicious correlations between the Bitcoin price and Tether was cited by John M Griffin and Amin Shams from the University of Texas at Austin. Their conclusion fueled the fire of speculation following the subpoena of Bitfinex and Tether by US regulators in January this year.
However, despite the mounting concerns around Tether, a recent series of conclusions from a couple of research initiatives have presented a converse picture of Tether’s role and legitimacy.
New Evidence and a Contrary View of Tether
The conversation around Tether is important for a variety of reasons. As a net positive for the cryptocurrency markets, it provides much needed stable value for crypto-crypto exchanges that exist outside of the US. With Tether, they can basically make USD fiat-crypto trade pairings without actually having to interact with US regulators.
On the other hand, Tether represents a substantial portion of Bitcoin’s base pair liquidity. Tether plays a prominent role in the broader cryptocurrency market liquidity as a result, and its lack of transparency as a fiat-collateralized stablecoin makes many people uneasy with its role.
Before claims of Tether — overseen by Tether Limited on the Omni Protocol — functioning as a fractional-reserve bank in the University of Texas study, Tether had previously dissolved its relationship with audit firm Friedman LLP. This led to increasing concerns about the legitimacy of its books. However, a recent report by law firm Freeh, Sporkin & Sullivan LLP back in June corroborated Tether’s claim that the circulating supply of Tethers is fully backed by USD. They concluded that:
“FSS is confident that Tether ’s unencumbered assets exceed the balance of fully-backed USD Tethers in circulation as of June 1st, 2018.”
More recently, a Medium post summarizing research into Tether’s role in Bitcoin liquidity as a risk assessment by Sylvain Ribes and Hasu elucidates some interesting insights. Sylvain Ribes has also extensively researched and reported on fake cryptocurrency exchange volumes and conflicts of interests with ranking sites like CoinMarketCap that play an important role with Tether.
As part of their research into Tether liquidity, they found that USDT only makes up 29 percent of Bitcoin’s base pair liquidity compared to the 82 percent and 62 percent reported by the WSJ and CMC, respectively. They do remark that 29 percent is still a high correlation though and should be taken into account when assessing Tether’s risk, especially considering its close ties to Bitfinex.
Further investigation of their study dives into potential effects of a solvency crisis versus a liquidity crisis for both Tether and Bitfinex, who share the same parent company, iFinex Inc. A solvency crisis would present a doomsday scenario for cryptocurrency markets, effectively making $2.8 billion in Tether worthless. However, research by Bitmex (their research is as good as it gets in crypto) demonstrates a robust relationship with Noble Bank in Puerto Rico, alleviating concerns of a solvency crisis.
A potential liquidity crisis, they conclude, would not “qualify as a systemic risk” owing to Bitfinex’s stability and the ability for Tether holders to eventually exit their positions. Despite this conclusion, a Tether liquidity crisis would assuredly have a significant impact on broader trust in cryptocurrency markets along with some short-term market effects.
Outside of studies into Tether’s legitimacy, solvency, or transparency you can find dilemmas such as Bloomberg’s accusation of Tether market manipulation by the Kraken exchange. Kraken responded aggressively, and the fallout was short-lived, but it represents another notch in the controversy around the stablecoin.
Tether will likely continue to be a polarizing cryptocurrency as it represents a USD-pegged stablecoin that exists outside of US regulatory control. However, its obvious benefits of providing a flexible price-stable peg for many cryptocurrency investors, including some critical Bitcoin liquidity, should not be overlooked. Investor decisions about using Tether should come with performing their own research and weighing the potential benefits and risks.